28 May Is the Government Feeding the Foreclosure Mess?

There is no doubt that the current economy is lackluster at best. There seems to be no shortage of finger-pointing for the blame and there are as many ideas to fix the problem as there are fingers pointing. Some will even deny that there is a problem. Many of the programs and ideas floating about require refinancing these failed mortgages using government money backed by taxpayer dollars.

Put aside the debate of whether it is appropriate to use taxpayer money to bail out both the lenders and the borrowers who made a bad deal to finance a house that is more expensive than the borrower can afford. Put aside the debate over personal responsibility of whether the lender or borrower should suffer the losses caused by a bad business decision. The question is whether these programs to curb foreclosures are, in fact, actually encouraging the filing of new foreclosures. Under many of these proposals, your mortgage must be behind in payments or in the process of foreclosure before you can qualify for a government sponsored refinance into a conventional low interest fixed rate loan. If you knew the requirements of such a program, what incentive do you have to continue making difficult payments your mortgage? The argument is that the very existence of these programs will only serve to encourage more people to default on their mortgages.

Keep in mind that the chances of success for these programs is less than 5%. Once the foreclosure ball starts rolling, it is very difficult to stop. These are all good reasons why the proposal to allow modification of residential mortgages in a Chapter 13 bankruptcy is a solution that costs taxpayers nothing and places the risks of loss and the benefits of success squarely on the lenders and borrowers where it belongs.